Brnic Van Wyk, Senior Manager, Asset/Liability Management
Understanding what drives the growth of your super balance over time can help you fine tune your investment strategy. What’s more it highlights how investment risk, as it relates to you, can change over time.
Simply put, when you’re saving for retirement there are three factors that determine how much you’ll have to live off when you retire. These are the contributions you make, how these contributions are invested and the overall length of time that you save for.
Contributions and investment returns are both necessary if you want to have a super balance that can support you in retirement. What may not be so obvious is that the relative importance of these factors depends on how long you’ve been saving for.
Let me explain.
A lot of the focus within the super industry and the media is on investment returns. Now of course investment returns matter, but when they really matter is towards the end of your working life when your account balance is likely to be at the highest level it’ll ever be.
This is the time when investment returns have typically overtaken contributions as making up the greater part of the value of your superannuation balance. And of course after you retire all of the growth of your balance will be from the investment returns you earn. The flip side of course is that it is also the time when negative investment returns can have the greatest impact on the value of your balance.
Conversely when you’re first starting out saving for retirement, the most important factor in growing your balance is the contributions you make. If there are no contributions to start with, there will be nothing to invest. The more contributions are made, the more there is to invest.
The graph below shows how a typical accumulation account balance grows over time. The dark blue portion is the contributions made, and the light blue portion represents investment returns. Over time, investment returns become a larger proportion of the total balance, but at the start, it’s the contributions that matter.
Graph is provided for illustrative purposes only
This shows there is effectively a ‘switch over’ point where the relative additional value of contributions is outweighed by the value of additional investment returns earned. We practically apply this into the investment strategy of our Lifetime option. As investors move to the point where returns become the largest contributor to their balance, the Lifetime option manages the impact of investment risk on larger account balances by automatically starting to de-risk the portfolio.
So what’s the take out here? A couple of things I would say. Firstly, contributions matter. They are the foundation of retirement savings. Secondly, investment returns can have a greater impact on your balance the closer you get to retirement. This impact can be positive or negative. It’s food for thought when you next review your investment strategy.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Senior Manager, Asset/Liability Management
Brnic plays a leading role in developing QSuper’s Asset/Liability framework, model and governance structures and continues to monitor Australian and international research relevant to the Lifetime Accumulation program.